Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

"Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be read in conjunction with the accompanying consolidated
financial statements and "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report on Form 10-K
of Inergy, L.P. for the fiscal year ended September 30, 2010.

The statements in this Quarterly Report on Form 10-Q that are not historical
facts, including most importantly, those statements preceded by, or that include
the words "may", "believes", "expects", "anticipates" or the negation thereof,
or similar expressions, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such forward-looking statements include, but are not limited to,
statements that: (i) the North/South Pipeline project is expected to have firm
transportation capacity of 325,000 dekatherms per day and the Finger Lakes LPG
expansion project is expected to convert certain of the US Salt caverns into LPG
storage with a capacity of up to 5 million barrels, (ii) management believes
that Inergy does not have material potential liability in connection with the
unitholder class action lawsuits that would have a significant financial impact
on its consolidated financial condition, results of operations or cash flows,
(iii) we believe that volatility in commodity prices will continue, and our
ability to adjust to and manage our operations in response to this volatility
may impact our operations and financial results, (iv) we believe that the
economic downturn that began in the second half of 2008 has caused certain of
our retail propane customers to conserve and thereby purchase less propane,
(v) we believe our midstream operations could be negatively affected in the long
term by sustained downturns or sluggishness in the economy, which could affect
long-term demand and market prices for natural gas and NGLs, (vi) we anticipate
completion of the Finger Lake LPG expansion project in the first half of fiscal
2012, and (vii) we believe that anticipated cash from operations and borrowings
under our credit facility will be sufficient to meet our liquidity needs for the
foreseeable future. Such forward-looking statements involve risks, uncertainties
and other factors which may cause the actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, the following: weather in our area of
operations; market price of propane; availability of financing; changes in, or
failure to comply with, government regulations; the costs, uncertainties and
other effects of legal and administrative proceedings and other risks and
uncertainties detailed in our Securities and Exchange Commission filings. For
those statements, we claim the protections of the safe harbor for
forward-looking statements contained in the Reform Act. We will not undertake
and specifically decline any obligation to publicly release the result of any
revisions to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect events or circumstances after
anticipated or unanticipated events.

Overview

We are a growing retail and wholesale propane supply, marketing and distribution
business. We also own and operate a growing midstream business that includes
four natural gas storage facilities ("Stagecoach", "Thomas Corners", "Steuben"
and "Tres Palacios"), a liquefied petroleum gas ("LPG") storage facility
("Finger Lakes LPG"), a natural gas liquids ("NGL") business and a
solution-mining and salt production company ("US Salt"). We further intend to
pursue our growth objectives in the propane and midstream business through,
among other things, future acquisitions. Our propane acquisition strategy
focuses on propane companies that meet our acquisition criteria, including
targeting acquisition prospects that maintain a high percentage of retail sales
to residential customers, operating in attractive markets and focusing our
operations under established and locally recognized trade names. Our midstream
growth objectives focus both on organically expanding our existing assets and
acquiring future operations that leverage our existing operating platform,
produce predominantly fee-based cash flow characteristics and have future
organic or commercial expansion characteristics.

Both of our operating segments, propane and midstream, are supported by business
development personnel groups. These groups' daily responsibilities include
research, sourcing, financial analysis and due diligence of potential
acquisition targets and organic growth opportunities. These employees work
closely with the operators of both of our segments in the course of their work
to ensure the appropriate growth opportunities are pursued.

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We have grown primarily through acquisitions. Since the inception of our
predecessor in November 1996 through March 31, 2011, we have acquired 89
companies, including 82 retail propane companies and 7 midstream businesses, for
an aggregate purchase price of approximately $2.9 billion, including working
capital, assumed liabilities and acquisition costs.

On October 14, 2010, we completed the acquisition of Tres Palacios Gas Storage
LLC ("Tres Palacios"), which owns and operates a natural gas storage facility
located in Matagorda County, Texas. Tres Palacios leases the surface and
subsurface rights necessary to operate and expand the storage facility under an
operating lease that expires on December 31, 2037, which is subject to automatic
renewal for two 20-year extension periods unless Tres Palacios elects not to
extend the term of the lease. The lease payments vary based on the
FERC-certificated working gas capacity of the caverns which are in service as
well as an incremental payment for physical volumes of gas injected and / or
withdrawn from the caverns in service. Based on our current estimates, which
assumes cavern 4 will be in service during the second fiscal quarter of 2014, we
anticipate that the contractual obligation as of March 31, 2011, to be the
following (in millions, excluding the above mentioned incremental payments as
future volumes are currently unknown):

Total Less than 1 year 1-3 years 4-5 years After 5 years
$ 406.7 $ - $ 22.8 $ 28.2 $ 355.7

On October 19, 2010, we completed the acquisition of the propane assets of
Schenck Gas Services, LLC ("Schenck"), located in East Hampton, New York. On
November 15, 2010, we completed the acquisition of the propane assets of
Pennington Energy Corporation ("Pennington"), headquartered in Morenci,
Michigan.

The purchase price allocations for these acquisitions have been prepared on a
preliminary basis pending final asset valuation and asset rationalization, and
changes are expected when additional information becomes available. Changes to
final asset valuation of prior fiscal year acquisitions have been included in
our consolidated financial statements but are not material.

The retail propane distribution business is largely seasonal due to propane's
primary use as a heating source in residential and commercial buildings. As a
result, cash flows from operations are generally highest from November through
April when customers pay for propane purchased during the six-month peak heating
season of October through March.

Because a substantial portion of our propane is used in the weather-sensitive
residential markets, the temperatures realized in our areas of operations,
particularly during the six-month peak heating season of October through March,
have a significant effect on our financial performance. In any given area,
warmer-than-normal temperatures will tend to result in reduced propane use,
while sustained colder-than-normal temperatures will tend to result in greater
propane use. Therefore, we use information on normal temperatures in
understanding how historical results of operations are affected by temperatures
that are colder or warmer than normal and in preparing forecasts of future
operations, which are based on the assumption that normal weather will prevail
in each of our operating regions. "Heating degree days" are a general indicator
of how weather impacts propane usage and are calculated for any given period by
adding the difference between 65 degrees and the average temperature of each day
in the period (if less than 65 degrees). While a substantial portion of our
propane is used by our customers for heating needs, our propane operations are
geographically diversified and not all of our propane sales are weather
sensitive. Together, these factors may make it difficult to draw definitive
conclusions as to the correlation of our gallon sales to weather calculations
comparing weather in a year to normal or to the prior year.

The retail propane business is a "margin-based" business where the level of
profitability is largely dependent on the difference between sales prices and
product costs. Propane prices continued to be volatile during 2010 and thus far
in 2011. At the main pricing hub of Mount Belvieu, Texas ("Mt. Belvieu Price")
during the three-month period ended March 31, 2011, the average Mt. Belvieu
Price was $1.40 with prices ranging from a low of $1.31 per gallon to a high of
$2.29 per gallon and a price of $1.37 per gallon at March 31, 2011. During the
six-month period ended March 31, 2011, the average propane price was $1.33 with
propane prices ranging from a low of $1.17 per gallon to a high of $2.29 per
gallon. Further the average Mt. Belvieu Price in our fiscal years of 2008, 2009
and 2010 was $1.59, $0.77 and $1.12 per gallon, respectively. Our ability to
pass on price increases to our customers and our hedging program has
historically limited the impact that such volatility has had on our results from
operations and we will continue to hedge virtually 100% of our exposure from
fixed prices; however, those higher propane costs have led to higher selling
prices by us and have negatively impacted our volume sales and may continue to
do so in the future for reasons discussed below. While we have historically been
successful in passing on any price increases to our customers, there can be no
guarantees that this trend will continue in the future. In periods of increasing
propane costs, we have experienced a decline in our gross profit

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as a percentage of revenues. In addition, during those periods we have
historically experienced conservation of propane gallons used by our customers
in addition to lesser gallon sales as a result of customers switching to lower
price propane providers as well as alternative energy sources, all of which has
resulted in a decline in gross profit. These trends generally increase in
periods of sustained cost increases such as we have experienced thus far in
fiscal 2011. Further, improved technology in new appliances, including those
using propane, has resulted in fewer gallons of propane used by our customers
for their needs thus resulting in lesser gallon sales for us. In periods of
decreasing costs, we have experienced an increase in our gross profit as a
percentage of revenues. There is no assurance that because propane prices
decline customers will use more propane and thus historical gallon sales
declines we've attributed to customer conservation and losses will reverse.
Propane is a by-product of both crude oil refining and natural gas processing
and thus typically follows the same pricing pattern as these two commodities
with crude oil pricing being the more influential of the two historically. The
prices of crude oil and natural gas had maintained historically high costs in
calendar years 2007 and 2008 before both began to fall rather dramatically in
late 2008 and throughout the 2008-2009 winter season. While natural gas pricing
has remained at historically low levels since this decline, crude oil costs
leveled off in the spring of 2009 before beginning another increase that
persisted through both winter seasons of 2009-2010 and 2010-2011 with propane
prices following a similar pattern for the majority of this time. As such, our
selling prices of propane have been at higher levels in order to attempt to
maintain our historical gross margin per gallon with these higher prices
negatively impacting our volume sales for the reasons discussed above. We do not
attempt to predict the underlying commodity prices; however, we monitor these
prices daily and adjust our operations and retail prices to maintain expected
margins by passing on the wholesale costs to end users of our product. We
believe that volatility in commodity prices will continue, and our ability to
adjust to and manage our operations in response to this volatility may impact
our operations and financial results.

We believe that the economic downturn that began in the second half of 2008 has
caused certain of our retail propane customers to conserve and thereby purchase
less propane and in some instances shop for lower prices that may be available
from other suppliers or shop for alternative energy sources to replace some or
all of their propane usage. This trend is expected to continue throughout the
life of the economic downturn. In addition, although we believe the economic
downturn has not currently had a material impact on our cash collections, it is
possible that a prolonged economic downturn could have a negative impact on our
future cash collections.

We believe our wholesale supply, marketing and distribution business complements
our retail distribution business. Through our wholesale operations, we
distribute propane and also offer price risk management services to propane
retailers, resellers and other related businesses as well as energy marketers
and dealers, through a variety of financial and other instruments, including:

• forward contracts involving the physical delivery of propane;

• swap agreements which requires payments to (or receipt of payments from)
counterparties based on the differential between a fixed and variable
price for propane; and

• options, futures contracts on the New York Mercantile Exchange and other
contractual arrangements.

We engage in derivative transactions to reduce the effect of price volatility on
our product costs and to help ensure the availability of propane during periods
of short supply. We attempt to balance our contractual portfolio by purchasing
volumes only when we have a matching purchase commitment from our wholesale
customers. However, we may experience net unbalanced positions from time to
time.

Our midstream operations primarily include the storage, processing,
fractionation and sale of natural gas and NGLs and, to a lesser extent, the
wholesale distribution of salt from solution mining operations of US Salt. The
cash flows from these operations are predominantly fee-based under one to ten
year contracts with substantial, creditworthy counterparties and, therefore, are
generally economically stable and not significantly affected in the short term
by changing commodity prices, seasonality or weather fluctuations.

We believe our midstream operations could be negatively affected in the long
term by sustained downturns or sluggishness in the economy, which could affect
long-term demand and market prices for natural gas and NGLs, all of which are
beyond our control and could impair our ability to meet our long-term goals.
However, we also believe that the contractual fee-based nature of our midstream
operations may serve to mitigate this potential risk.

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The majority of our operating cash flows in our midstream operations are
generated by our natural gas storage operations. Most of our natural gas storage
revenues are based on regulated market-based tariff rates, which are driven in
large part by competition and demand for our storage capacity and
deliverability. Demand for storage in our key midstream market in the
northeastern United States is projected to continue to be strong, driven by a
shortage in storage capacity and a higher than average annual growth in natural
gas demand. This demand growth is primarily driven by the natural gas-fired
electric generation sector and conversion from petroleum based fuels. Demand for
storage in Texas is expected to strengthen driven primarily by growth in natural
gas fired generation and increasing gas supplies from growing shale developments
such as the Eagle Ford shale. Demand for storage can be negatively impacted
during periods in which there is a narrow seasonal spread between current and
future natural gas prices. The natural gas industry is currently experiencing a
significant shift in the sources of supply, and this dramatic change could
affect our operations.

Traditionally, supply to our markets has come from the Gulf Coast region,
onshore and offshore, as well as from Canada. The national supply profile is
shifting to new sources of natural gas from basins in the Rockies,
Mid-Continent, Appalachia and East Texas. In addition, the natural gas supply
outlook includes new LNG regasification facilities under various stages of
development in multiple locations. LNG can be a new source of potential supply,
but the timing and extent of incremental supply ultimately realized from LNG is
yet to be determined and, at present, LNG remains a small percentage of the
overall supply to the markets we serve. These supply shifts and other changes to
the natural gas market may have an impact on our storage operations and our
development plans and may ultimately drive the need for more domestic capacity
for natural gas storage.

Currently, we have three significant capital projects related to our midstream
operations: (1) Finger Lakes LPG storage expansion, (2) North/South Pipeline
Project and (3) MARC I Hub Line Project. The Finger Lakes LPG storage expansion
project relates to the development of certain caverns acquired in the
acquisition of US Salt in August 2008. The solution mining process creates
caverns that can be developed into LPG or natural gas storage after the salt has
been extracted. The Finger Lakes LPG expansion project, which is located in
Watkins Glenn, New York, is expected to convert certain of the caverns at US
Salt into LPG storage with a capacity of up to 5 million barrels. While we
anticipate completion of this project in the first half of fiscal 2012, this
completion continues to be pending regulatory approval, which approval progress
thus far has been slow so there can be no assurance this completion date will be
met.

The North/South Pipeline Project consists of adding additional compression and
measurement facilities to our existing Stagecoach Laterals and when completed is
expected to have firm transportation capacity of 325,000 dekatherms per day. We
received the FERC approvals required for the project in January 2011, and
commenced construction in February. The North/South Project is supported by
long-term contracts and is expected to be placed into service by late 2011.

The MARC I Hub Line Project is a 40 mile, 30" bi-directional pipeline located in
Bradford, Sullivan, and Lycoming counties in Pennsylvania. The planned pipeline
will extend between our Stagecoach South Lateral interconnect with Tennessee Gas
Pipeline Company's ("TGP") near its compressor station 319 and Transco's Leidy
Line near its compressor station 517. The MARC I Hub Line Project is expected to
have a minimum of 550,000 dekatherms per day of firm transportation capacity. We
expect the MARC I Hub Line Project to be placed into service in mid-2012.

Our MARC I Hub Line Project and the North/South Project, when placed into
service, will allow us to wheel volumes on a firm transportation basis through
approximately 75 miles of pipe to and from TPG's 300 Line, Transco's Leidy Line
and the Millennium Pipeline and all points in between. The two projects combined
are expected to add over 45,000 horsepower of additional compression and 875,000
dekatherms per day of transportation capacity to our midstream business in the
Northeast.

As we execute on our strategic objectives, capital expansion projects will
continue to be an important part of our growth plan. We have committed capital
and investment expenditures at March 31, 2011, of approximately $85.2 million in
our midstream operations. These capital requirements, along with the
refinancings of normal maturities of existing debt, will require us to continue
long-term borrowings. An inability to access capital at competitive rates could
adversely affect our ability to implement our strategy. Market disruptions or a
downgrade in our credit ratings may increase the cost of borrowing or adversely
affect our ability to access one or more sources of liquidity. During the past
several years, capital expansion projects have been exposed to cost pressures
associated with the availability of skilled labor and the pricing of materials.
Although certain costs have begun to decrease, there will be continual focus on
project management activities to address these pressures as we move forward with
planned expansion opportunities. Significant cost increases could negatively
affect the returns ultimately earned on current and future expansions.

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Our midstream operations in the United States are subject to regulations at the
federal and state level. Regulations applicable to the gas and NGL storage
industries have a significant effect on the nature of our midstream operations
and the manner in which they operate. Changes to regulations are ongoing and we
cannot predict the future course of changes in the regulatory environment or the
ultimate effect that any future changes will have on our midstream operations.

Volume. During the three months ended March 31, 2011, we sold 129.7 million
retail gallons of propane, a decline of 17.5 million gallons or 11.9% from the
147.2 million retail gallons sold during the same three-month period in 2010.
Gallons sold during the three months ended March 31, 2011, decreased as compared
to the same prior year period as a result of lower volumes sold at our existing
locations of 22.3 million gallons, partially offset by acquisition-related
volume of 4.8 million gallons. There were several factors, we believe, that
contributed to the declining volumes at existing locations: (1) continued
customer conservation, which we believe has resulted from the continued impact
of the overall weak United States economic environment and higher propane costs,
which continued to increase during the three month period ended March 31, 2011,
(2) volume declines from net customer losses due primarily to higher sales
prices, and (3)

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the impact of warmer temperatures in our South and Southeast areas of
operations. The average wholesale cost of propane has increased approximately
12% during the three months ended March 31, 2011, compared to the same prior
year period and the average cost for the most recent trailing twelve month
period was approximately 23% higher than for the comparable prior trailing
twelve month period, continuing to impact customer buying decisions and
conservation trends. Gallon sales were impacted by warmer weather in our South
and Southeast areas of operations as it was approximately 20% warmer during the
three months ended March 31, 2011 compared to the same prior year period. Volume
was further impacted by colder weather in certain areas of our operations,
notably the Northeast and Midwest, which combined were approximately 7.3% colder
than last year and approximately 4.0% colder than normal. On a consolidated
retail basis, the weather was approximately 1.3% warmer than last year and 2.5%
colder than normal for our geographic areas.